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	England and Wales Court of Appeal (Civil Division) Decisions
You are here: BAILII >> Databases >> England and Wales Court of Appeal (Civil Division) Decisions >> O'Donnell & Sons (Huddersfield) Ltd v Midland Bank Plc [2001] EWCA Civ 2108 (30 November 2001) URL: http://www.bailii.org/ew/cases/EWCA/Civ/2001/2108.html Cite as: [2001] EWCA Civ 2108

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IN THE SUPREME COURT OF JUDICATURE
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE CHANCERY DIVISION
(His Honour Judge Behrens)

		Royal Courts of Justice Strand London WC2 Friday, 30th November 2001

Friday, 30th November 2001

1. LORD JUSTICE PETER GIBSON: I will ask Arden LJ to give the first judgment.
2. LADY JUSTICE ARDEN: This is an appeal by the claimant in this action, whom I shall call "the Company", with the leave of the judge from the order of His Honour Judge Behrens dated 22nd February 2001 whereby in response to certain preliminary questions the Court declared that, upon the true construction of the Debenture dated 12th February 1990 made between the Company and Midland Bank Plc, the sum of £111,671.70 received by the Bank between 7th April 1994 and 22nd February 1995 (and forming part of the consideration of £180,000 payable by Alstan Ltd for the assets of the Company sold pursuant to the terms of an agreement of sale dated 7th February 1994) constituted an "other debt" due, or owing or incurred to the claimant within the meaning of clause 4(a) of the Debenture and that, upon the true construction of the Debenture, the sum of 111,671.70 was charged to the Bank by way of the first fixed charge created by Clause 4(a) of the Debenture. Having so decided the preliminary issues, the judge dismissed the action.
3. The facts in this action were agreed and I can simply summarise them. On 12th April 1990 the Company executed a debenture in favour of the Bank. I will refer to it as "the Debenture". On 19th April 1990 the Debenture was duly registered at the Companies' Registry. On 27th January 1994 the directors of the Company were advised that the Company might be insolvent and that directors ought not to allow any further credit to be taken and that no creditor of the Company should be paid in priority to any other. On 7th February 1994 the Company sold all its fixtures, fittings, plant and machinery, business contracts, contracts, goodwill, intellectual property rights and other assets (other than those specifically excluded) for a total consideration of £180,000 payable by 12 monthly instalments of £15,000. The purchaser was Alstan. On 11th February 1994 the Company was wound up voluntarily. On 22nd February 1994 the Bank - that is the defendant in this action - appointed receivers pursuant to the Debenture. The Company was then indebted to the Bank in the sum of approximately £278,000. In the sworn statement of affairs put before the meeting of creditors of the company held on 23rd February 1994, it was stated that the company had ceased to trade on 31st January 1994 and the assets specifically pledged at that date included a debt due from Alstan of £180,000. Between 7th April 1994 and 22nd February 1995 the receivers appointed by the Bank received a sum of £180,000 from Alstan from which they deducted the costs and fees incurred in respect of the collection of this sum and paid the balance of £11,671.70 to the Bank.
4. I will turn now to the relevant clauses of the Debenture.
5.  Clause 4 of the Debenture provides as follows:

"The Company as beneficial owner HEREBY CHARGES in favour of the Bank:-

(a)by way of first fixed charge all book debts and other debts now and from time to time hereafter due owing or incurred to the Company other than such of the said debts as the Bank may have specifically have agreed in writing to exclude from such first fixed charge (hereinafter collectively called `the debts'); and

(b)by way of floating charge all other undertaking of the Company and all other property whatsoever and wheresoever both present and future including its uncalled capital for the time being and such of the book debts and other debts referred to in Clause 4(a) which are not charged hereunder by way of first fixed charged (hereinafter collectively called `the assets')."

6. Clause 5(a) provided as follows:

"The Company shall not except with the prior written consent of the Bank-

(a)purport to create or permit to subsist over all or any of the debts any mortgage charge lien pledge or other security other than this Charge..."

7. Clause 5(e) provided:

"(e)deal with its book or other debts or securities for money forming part of the assets otherwise than in the ordinary course of getting in and realising the same which course shall not include or extend to the selling or assigning or in any other way factoring or discounting of any of the said debts or securities."

6 UNTIL this Charge is discharged the Company will:-

(a)get in and realise the debts in the ordinary course of its business (which shall not extend to the selling or assigning or in any other way factoring or discounting the same) and hold the proceeds of such getting in and realisation of the debts (until payment debts to the special account as hereinafter provided) upon trust for the Bank;

(b)pay the proceeds of such getting in and realisation of the debts into such separate and denominated account with the Bank (the `special account') as the Bank may require."

8. The judge gave a careful and lucid judgment. He made findings on the basis of the expert evidence of two expert accountants, Mr Emile Wolf, called by the claimant, and Mr Thompson, called by the Bank. Although there was no finding to this effect, it would appear that both experts thought that the sum due from Alstan would be written up in some way in the accounting records of the Company. But there was some dispute between the experts as to the proper presentation of the sums received from Alstan in the accounts of the Company. Mr Thompson considered that they would be entered under the heading "other debtors" and that there would be a note to the account to explain precisely what the debt was; whereas Mr Wolf's view was that there should be a new heading describing the debt as "amount due from the sale of business assets". The critical feature so far as Mr Wolf was concerned was that the disposal of significant assets after the Company had ceased trading was a significant difference. The judge held that the difference between the experts on this point was rather a matter of style than substance, and he accepted that the construction of clause 4(a) could not depend on whether an accountant would have placed the debt under "other debtors" with a note to the accounts or under a different heading in the accounts. The judge went on to hold that expert evidence was not admissible on the question of what constituted "other debts" for the purposes of the Debenture. In conclusion he held, as I have explained, that the amounts due from Alstan were within the phrase "other debts". He gave three reasons for his decision. He said this:

"1.I think that the expression `other debts' was intended to be a mopping up clause covering all debts other than book debts. I cannot accept that there was some special category of debt excluded from the clause. Thus once it is accepted that the Alstan liability is a debt it is within clause 4(a).

2.The decision in Re Brightlife and the cases that follow it are clearly distinguishable on the grounds that the cash at the Bank was held not to be a debt at all.

3.Whilst there is an obligation in clause 6(a) to collect the debts in the ordinary course of business, I am in the end persuaded that that is not a reason to imply an equivalent term to the definition of other debts in clause 4(a). It was conceded that if there had been a sale of a business asset on credit terms whilst the business was a going concern that would have been an `other debt'. Such a sale would not have been in the ordinary course of business. Furthermore Mr Tamlyn's example of the sale of stock on credit at a closing down sale shows that it is not necessary for a business to be carried on."

9. I now turn to the submissions made by the parties. There is no issue as to the meaning of "book debt" because it is a common ground that the debt due from Alstan could not be a book debt.
10. I turn first to the appellant's submission. Mr. James Allen QC (for the appellant) submits that the judge erred in holding that the evidence of expert witnesses was not admissible for determining whether the £111,601.70 constituted an "other debt" within the meaning of clause 4(a) of the Debenture. In that context, submits Mr Allen, the expression "other debts" should be given a meaning that would be attributed to it by an accountant and not its legal definition. In support of this he relies on the decision of Hoffmann J in Re Brightlife Ltd [1987] Ch 200, and in particular to a passage at 2O8 F. The issue with which his Lordship was concerned was the question of whether a credit balance at a bank was properly described as a book debt or other debt within the meaning of a similarly phrased debenture. At 208 G he said this:

"... I do not think that the bank balance falls within the term "book debts or other debts" as it is used in the Debenture. It is true that the relationship between banker and customer is one of debtor and creditor. It would not therefore be legally inaccurate to describe a credit balance with a banker as a debt. But this would not be a natural usage for a businessman or accountant. He would ordinarily describe it as `cash at bank': compare the balance sheet formats in Part 1, section B of Schedule 4 to the Companies Act 1985."

11. Mr Allen also relied on the similar holding of Hoffmann J in Re: Permanent Houses Holding Ltd [1988] BCLC 563 at 566 G where Hoffmann J refers to his earlier decision in Brightlife.
12. Mr Allen also relies on the decision of the Court of Appeal of Northern Ireland in Northern Bank Ltd v Ross [1991] 1 BCLC 504. The Court of Appeal had to deal with the construction of a similar debenture, and therefore was similarly concerned with the question of the meaning of "book or other debts". It was argued by Mr Girvan QC for the Northern Bank that the fixed charge was an instrument drafted in legal terms and that the primary legal meaning of the words "book debts and other debts" included the debt owed by the Bank in that case to the Company. Counsel for the liquidator, Mr Lavery QC, argued, on the contrary, that the phrase "book debts and other debts" should be given the meaning attached to it in business and accountancy practice.
13. At page 508 H Sir Brian Hutton CJ held that the Court could take account of the provisions of the Companies Act in construing the Debenture. He added this:

"... I further consider that the court can take account of accepted business and accountancy practice without evidence being adduced as to the existence of such practice."

14. Then he referred to the well-known decision in Prenn v Simmonds.
15. Mr Allen submits that an accountant would naturally attribute to the term "other debts", in this context, the meaning of debts incurred in the ordinary course of normal business activities; and thus the expression would not include debts which had been incurred outside the normal course of business, such as on the sale of all, or substantially all, the assets of the Company. Alternatively, on Mr Allen's submission the expression "other debts" would not be considered by an accountant to extend to the sum of £180,000, or the sum of £111,671.70 in this case, because such sums would, as a matter of accountancy, be referred to in the annual accounts of the Company as amounts received from the disposal of assets; and that is supported by the evidence of Mr Wolf. In the further alternative Mr Allen submits that, since the assets sold were subject to the floating charge created by clause 4(b) of the Debenture, such debts could not fall within the fixed charge created by clause 4(a). He compared the situation which would have arisen if the sale had not been made or if the floating charge had crystallised prior to the winding up or, indeed, without a winding up. In those circumstances the assets would, on his submission, have been available for preferential claims and the costs and expenses of the winding up of the Company on entering into the liquidation. I will refer to this below as the "as if" argument.
16. Before us at this hearing of the appeal Mr Allen has sought to pursue the "as if" argument on the basis that the Company in this case in fact ceased to trade on 31st January 1994: so that the charge crystallised on that date with the consequence that the assets were subject to a crystallised floating charge at the date of sale. The difficulty for Mr Allen on this is that this is a new point and that there is no finding of fact that the Company ceased to trade on that date. Therefore, in my judgment, this new point is not one which can now be raised on this appeal. Mr Allen further submits that it was the intention of the parties that the assets, other than the book debts and other debts, should be the subject of the floating charge, whereas the other assets would be subject to a fixed charge within clause 4(b); and in that connection he relies on clauses 5(b) and 6(a) and (b) as showing that intention. However, that was an argument which he made in his skeleton argument but which is not pursued before the court.
17. In a further alternative, he submits that the sum which was actually received on receipt did not constitute a book debt or other debt due and owing to the Company within clause 4(a) of the Company debenture.
18. I will now turn to the respondent's submissions.
19. We did not call on the respondent but had the benefit of the respondent's skeleton argument. I propose to summarise the respondent's submissions very briefly.
20. Mr Robin Knowles QC (for the respondent) contends that "other debts" are "debts other than book debts", and that the debt due from Alstan to the Company was a debt other than a book debt. It is not appropriate, on his submission, to compare the situation which would have arisen if there had been no sale or if the floating charge had continued to float to the date of winding up. Those were not situations in point. As regards clauses 5(e) and 6(a) and (b) of the Debenture, he submits that references to "realisation" in these clauses are apposite to a debt payable under a contract for the sale of the assets of the Company, and that references to "ordinary course" in those clauses were references to the required manner of realisation, if a debt is to be realised, and not as to whether there is or is not a debt.
21. Further, on Mr Knowles' submission, the expression "other property" in clause 4(b) is property other than that referred to in class 4(a), i.e. property other than "book debts and other debts", and that the sale to Alstan to must be recognised unless it is set aside under the law of insolvency.
22. I now turn to my conclusions. The principal question is what the expression "or other debts" means in the context of this debenture. That expression is not, in my judgment, a term of art. The term "book debt" on the other hand is a term of art. The term is used in what is now section 395 of the Companies Act 1985 and in that context it has been held to mean debts which in the ordinary course of a business "would or should be entered in well-kept books relating to that business" - these days, accounting records: see Paul & Frank Ltd v Discount Bank (Overseas) Ltd [1967] Ch 348 and see generally Buckley on the Companies Act 15th Ed. (2000) para. [396.91]0[396.92]. Accountancy evidence may be led for the purposes of showing what debts would in the ordinary course of a business be kept in the accounting records of the company. For that purpose accountancy evidence is admissible. Since the parties in this case, however, are agreed that the debt from Alstan is not a book debt, in my judgment such expert evidence is not admissible in this case.
23. The appellant relies on the fact that in Brightlife Hoffmann J held that the term "debt" bore its meaning as a matter of accountancy or business usage. It is to be noted that Hoffmann J did not in Brightlife treat that as the sole ground of his decision. Rather, at page 209, he goes on to say that if clause 2(a) in that case - the equivalent of clause 4(a) in this case -had stood alone, he might have been left in some doubt as to whether "debts" was being used in a commercial or strictly legal sense. He went on to say:

"But in my judgment the ambiguity is resolved by the use of the same words in clause 5(ii), which prohibits Brightlife from dealing with its `book or other debts' without the prior consent in writing of Norandex `otherwise than in the ordinary course of getting in and realising the same.' A credit balance at the bank cannot sensibly be `got in' or `realised', and the proviso cannot therefore apply to it. If `book or other debts' includes the bank balance, the consequence is that Brightlife could not have dealt with its bank account without the written consent of Norandex. It would have had to obtain such consent every time it issued a cheque. The extreme commercial improbability of such an arrangement satisfied me that the parties used `book debts and other debts' in a sense which excludes the credit balance at the Bank."

24. So the fact that the expression "book or other debts" would not (as a matter of natural usage for businessmen or an accountant) include a separate balance at bank was not the sole ground of the decision. Indeed Hoffmann J states that he might be have been left in some doubt as to whether the expression "debt" had its legal meaning if that had been the only point in the case. Instead he also relied on the equivalent of clause 6(a) in this case.
25. For my own part, I consider that the correct approach to the expression "other debts" is that which is in accordance with the principles of interpretation set out by the House of Lords in Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896. The passage to which I refer in the speech of Lord Hoffmann is well-known. His Lordship said this:

"... I think I should preface my explanation of my reasons with some general remarks about the principles by which contractual documents are nowadays construed. I do not think that the fundamental change which has overtaken this branch of the law, particularly as a result of the speeches of Lord Wilberforce in Prenn v Simmonds [1971] 1 W.L.R. 1381, 1384-1386 and Reardon Smith Line Ltd v Yngvart Hansen-Tangen [1976] 1 W.L.R. 989, is always sufficiently appreciated. The result has been, subject to one important exception, to assimilate the way in which such documents are interpreted by judges to the commonsense principles by which any serious utterance would be interpreted in ordinary life. Almost all the old intellectual baggage of `legal' interpretation has been discarded. The principles may be summarised as follows.

(1) Interpretation is the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract.

(2) The background was famously referred to by Lord Wilberforce as the "matrix of fact", but this phrase is, if anything, an understated description of what the background may include. Subject to the requirement that it should have been reasonably available to the parties and to the exception to be mentioned next, it includes absolutely anything which would have affected way in which the language of the document would have been understood by a reasonable man.

(3) The law excludes from the admissible background the previous negotiations of the parties and their declarations of subjective intent. They are admissible only in an action for rectification. The law makes this distinction for reasons of practical policy and, in this respect only, legal interpretation differs from the way we would interpret utterances in ordinary life. The boundaries of this exception are in some respects unclear. But this is not the occasion on which to explore them.

(4) The meaning which a document (or any other utterance) would convey to a reasonable man is not the same thing as the meaning of its words. The meaning of words is matter of dictionaries and grammars; the meaning of the document is what the parties using those words against the relevant background would reasonably have been understood to mean. The background may not merely enable the reasonable man to choose between the possible meanings of words which are ambiguous but even (as occasionally happens in ordinary life) to conclude that the parties must, for whatever reason, have used the wrong words or syntax: see Mannai Investments Co. Ltd v Eagle Star Life Assurance Ltd [1997] [3 All ER 352].

(5) The `rule' that words should be given their `natural and ordinary meaning' reflects the common sense proposition that we do not easily accept that people have made linguistic mistakes, particularly in formal documents. On the other hand, if one would nevertheless conclude from the background that something must have gone wrong with the language, the law does not require judges to attribute to the parties an intention which they plainly could not have had."

26. So the key point is that the Debenture should be interpreted against the background of information that was reasonably available to the parties, and the object of the process is to ascertain the meaning which the Debenture would convey to a reasonable person having all that background information.
27. In this case the expert witnesses were divided on the meaning of an "other debt" and on its proper presentation as a matter of accountancy. In other words, in this case there was no accepted accountancy practice which could be said to form part of the information reasonably available to the parties to the Debenture when the Debenture was executed. The parties were, after all, a trading company and a bank. The court must, in my judgment, approach the interpretation of that document with the background that would be reasonably available to them, and that does not include the finer points of accountancy on which the expert witnesses themselves were not agreed.
28. As I see it, therefore, the judge was right not to admit the expert evidence on the meaning of "debt". In my judgment, the debt due from Alstan was clearly in law a debt -that is common ground - and it would also, in my judgment, have been a matter which would have been perfectly understood by the Company when executing the Debenture, and also by the Bank. It has not been suggested that there is anything in the Debenture to displace that meaning. I agree with the judge that clause 6(a) did not displace that meaning. The judge in referring to that as his third reason was no doubt influenced by the fact that in Brightlife Ltd the equivalent of clause 6(a) had been the basis on which Hoffmann J had held that a credit balance at bank was not a book or other debt. As appears from the passage I have already read, it could not be said to be "got in" or "realised" when the Company drew on it.
29. The point in this case, however, as Mr Knowles has pointed out, was a different one, namely, whether a debt occurred otherwise than in the ordinary course of business is a debt for the purposes of the Debenture. Clause 6 throws no light on this because it deals not with the circumstances in which a debt is incurred but with the manner in which it may be collected.
30. As to the other submissions by the appellant, I accept the respondent's submission with regard to what I have termed the appellant's "as if" argument. The court must construe the Debenture by the events which actually happened. There is nothing objectionable or impossible in law to creating a fixed charge over debts: see Agnew v Commissioner of Inland Revenue [2001] 3 WLR 454.
31. Finally, as regards the argument that the sum did not on receipt constitute a book or other debt, the critical date is the date of the appointment of the receivers - that is the date when the fixed and floating charge was enforced - and there is no evidence, as I have explained, to show that crystallisation occurred in the earlier date.
32. In the circumstances I would dismiss the appal.
33. MR JUSTICE MOORLAND: I agree.
34. LORD JUSTICE PETER GIBSON: I also agree.
Order: Appeal dismissed with costs subject to detailed assessment. Application for permission to appeal to the House of Lords refused.